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After independence, two of India’s larger states namely Tamil Nadu and Uttar Pradesh had the same per capita income around the year 1957. Since then, the two states have diverged over the years on major development indicators. Now, the prosperity of Tamil Nadu is three times that of Uttar Pradesh. Moreover, there is a sharp contrast between these two states on every parameter of social, economic, environmental and developmental growth. The key transformative role played was the power sector which has far-reaching multiplier effects on economic activities. But at present the power sector is in need of reforms.
One of the major drivers of Tamil Nadu’s growth was the social and economic awareness to get support like free power from the government for the welfare of the people across the segments. As a result, in the year 1999-2000, Tamil Nadu, had the highest per capita power consumption in entire South India with 484 kWh, much above the national average.
In a 2004 research analysis, Mathew Joseph noted that Tamil Nadu’s prosperity increased due to “the advanced stage of industrialization in the state. The low pricing of electricity to agriculture and domestic sectors and high pricing of industry, over the years has led to the share of the former sectors rising while the share of the latter sector falling particularly as the industrial sector has been moving to captive (sources of power generation).”
Now, it is well known that the electrification of the entire state of Tamil Nadu was achieved much before most states in the country. Part of the reason is that the state was able to get capital investments from the private sector for power generation and has built a robust and competitive environment over the years.
In a 2004 research analysis, Mathew Joseph noted that Tamil Nadu’s prosperity increased due to “the advanced stage of industrialization in the state. The low pricing of electricity to agriculture and domestic sectors and high pricing of industry, over the years has led to the share of the former sectors rising while the share of the latter sector falling particularly as the industrial sector has been moving to captive (sources of power generation).”
However, the state is losing its sectoral advantages in the power sector in recent years entirely due to a lack of vision, political leadership, and poor institutional governance structure. This has affected sectors across the economy. For example, it was reported last year that Uttar Pradesh had overtaken Tamil Nadu in becoming the state with the second highest GSDP.
To mitigate the power sector crisis in the country, the Union Finance Minister has announced in her Budget Speech that “in 2022-23, in accordance with the recommendations of the 15th Finance Commission, the states will be allowed a fiscal deficit of 4 per cent of GSDP of which 0.5 per cent will be tied to power sector reforms, for which the conditions have already been communicated in 2021-22.”
The announcement made in the Union Budget 2022-23 only reinforces the need for long-overdue power sector reforms especially the unbundling of states’ power distributions agencies, which are mostly debt ridden due to outdated modes of operation and services. General users are suffering due to frequent power cuts in Tamil Nadu. The recent CAG report on performance of power sector in Tamil Nadu has criticized the state for incurring thousands of crores of losses every year and for the purchase of poor quality coal, and so on.
The present DMK government has noted in its “White Paper on State Finances” that it is imperative to undertake reforms in the power sector in the state but there has been no progress so far to speak of. The State government has promised to bring out a sector-specific sector-wise White Paper on issues and challenges to overcome, but there is nothing yet with regard to the power sector.
There are incidents in the state where private power generators who have invested in wind and solar energy projects during the last few months of the previous regime in Tamil Nadu are now facing challenges in completing the projects and commissioning them. This is something that the DMK government should resolve soon.
The announcement made in the Union Budget 2022-23 only reinforces the need for long-overdue power sector reforms especially the unbundling of states’ power distributions agencies, which are mostly debt ridden due to outdated modes of operation and services. The recent CAG report on performance of power sector in Tamil Nadu has criticized the state for incurring thousands of crores of losses every year and for the purchase of poor quality coal, and so on.
Another aspect where reforms are needed are with regard to transmission and distribution (T&D) losses. It was 18% in 2021-22 in Tamil Nadu, which is higher than that prescribed by international best practices and also more than that of other major states in India. For the current year, a total provision of Rs 19,873 crore has been made in the Revised Budget Estimates 2021-22 towards subsidies for free supply of agricultural power, domestic supply, and for the takeover of losses made by Tamil Nadu Generation and Distribution Corporation Limited (TANGEDCO).
Tamil Nadu has already borrowed up to 3 % of GSDP value to bridge its fiscal gaps, this fiscal year. Its market borrowing is the highest in the country with an 11% share. The funds are mainly used for the welfare measures announced in the assembly elections of 2019. In 2021, 23 states took steps to reform their power sector by taking advantage of the clause that allows borrowing of up to 0.5% GSDP value from the market to bridge their fiscal deficit. However, Tamil Nadu puts its focus only how to fulfill its poll promises of welfare schemes with the massive borrowing from the market, and has not reformed the power sector.
It is high time that Tamil Nadu undertake power sector reforms, one of them being the introduction of direct benefit transfer (DBT) to all farmers. To implement DBT, the use of subsidized power by farms needs to be metered and measured. Neighboring state Andhra Pradesh has been able to do this and has been offering the subsidy by way of DBT, making the process more transparent. The aim of the union government, in seeking such reform, is not to cut down the free power to farmers but to regulate it for transparency with accountability and to reduce the T&D losses.
If Tamil Nadu does not take corrective measures to make the power sector more robust and competitive, then the burden would certainly be passed on to the people in general and industries in particular, resulting in higher tariffs, frequent power cuts, shutdowns, and further increase in T&D losses.
(The author is an economist and public policy expert)
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